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Sept. 27 — The European Commission's state aid enforcement director, facing criticism that the
EC is “living in a time warp” in telling Ireland to retroactively collect $14.5 billion
from Apple Inc., challenged tax lawyers and advisers to read the decision, which will
be redacted and published in a few weeks.

EU State Aid Scrutiny and Enforcement Director Karl Soukup, addressing a Sept. 27
session sponsored by Bloomberg BNA in conjunction with the International Fiscal Association
congress in Madrid, encouraged the audience to “read it twice” as it would show the
basis of the Apple decision “is not detached from economic reality but is in fact
deeply based in the economic reality created by the structure.”

The response followed an earlier IFA session discussing the European Union and direction
of policy around tax avoidance, with specific reference to concerns that the European
Union’s Anti-Tax Avoidance Directive was going beyond the OECD’s project to combat
tax base erosion and profit shifting measures.

As state aid decisions came under scrutiny, Philip Baker QC—a senior barrister who
acts for the Irish government’s legal team—also suggested the audience read the redacted
decision when it is published, as he said it would indicate the European Commission
is “living in a time warp.”

Soukup referred to Apple’s stateless structure, and said it wasn't up to the EC to
judge the correct channels for business for the tech giant. “But of course the amounts
are a little bit big out of Ireland, if you say how could these few thousand people
in Cork generate all those profits,”
he said.

“I think what is important is the trading income. And you know how trading income
can be generated. And what you need to manage and control such activities. It’s more
than a phone conference. You cannot actively manage and control operations in that
way,” he said.

The European Commission released a four-page summary of its decision in the Apple
case Aug. 31, saying that two Irish tax rulings allowed the world's richest company
an effective corporate tax rate of 0.005 percent on its European profits in 2014,
thereby distorting competition within the EU (25 Transfer Pricing Report 512, 9/15/16)

Not for the EC To Tax

A more dramatic attack on the EC decision came from another direction as U.S. Deputy
Assistant Treasury Secretary for International Tax Policy Robert Stack didn't waste
the opportunity to criticize the EU’s approach that Ireland should have extracted
more tax from Apple.

“That is income that is deferred for U.S. taxation—what some people might call stateless,
even if one doesn’t like the concept of stateless income—it doesn’t mean that the
EU gets to tax that income.”

Stack said he was gratified that European professionals and companies “are starting
to take into account enormity of the implications of the EU Commission taking over
vast elements” of tax “by declaring that when they find an advantage, whatever they
find, they have the power to declare state aid.”

“So I’m beginning to wonder whether, when the halo fades from European politicians
that brought these cases, this may be looked back on as a colossal blunder, by the
Commission,” said Stack.

Irish Residency Rules

Joe Duffy, partner at tax law firm Matheson in Dublin, provided background to the
debacle too. He cited a 1998 Irish Department of Finance report that stated following
proposals to change the rules—so that Irish companies could be a non-Irish resident
and have a connection to Ireland or controlled by a tax treaty partner—that the European
Commission confirmed this wouldn't be a problem as far as state aid rules are concerned.

“Later when the international tax requirements changed, and Ireland changed its core
tax residency rules—firstly by ensuring that an Irish incorporated company had to
be resident, this threatened so-called stateless companies,”
he said. “And now Ireland is being judged on international standards that have only
been expressed in the last few years,” said Duffy.

Not a U.S. Issue?

Stack said initially he didn’t believe the U.S. should be involved in the EU state
aid cases. But when the companies under investigation were predominantly American,
he said, he changed his view.

“When I saw three of the four first cases come out as U.S. companies, I’ve got to
be honest, I got very concerned that before I paid more attention, there could be
14 cases and at a cost to U.S. taxpayers.”

He said the first point of contention between the U.S. government and the commission
was the insistence that “this was always the law in the EU.”

“From the U.S. view, we had never seen a case in which the Commission looked at particular
application of a particular ruling in a tax affair, declared that it has disagreed
with it and said that was state aid,” he said.

The EC produced 65 state aid cases in all. “We duly went through them all, and we
think we have the better part of the argument—that this is a retroactive application
of a new standard to individual tax determination by member states, and that’s concerning,”
said Stack.

Arm's-Length Principle

Another problem with the commission's state aid approach concerns what is fast becoming
a view that its decisions are detracting from the OECD’s arm's-length principle.

Addressing this, Soukup said that the Commission “accepts the OECD transfer pricing
guidelines and international consensus.”

“If these rules are complied with in spirit and letter, it’s very unlikely that state
aid arises. We are focusing our work on outliers because we know that with all these
methods, you don’t arrive necessarily at one price but a range of outcomes.

“And if you have major outcomes, as long as you are in this reasonable range of outcomes,
there is no problem,” Soukup said.

Stack countered that in light of the Apple decision, the commission’s view represents
an “extraordinary rejection” of the arm's-length standard “that the European-dominated
OECD has spent 20 to 30 years establishing.

“It’s a remarkable departure from an entity of the EU that is a member of the G20
and voted to endorse the BEPS project,” Stack said.

European GAAR

More fundamentally, though, Europe’s expected general anti-avoidance rule (GAAR),
Stack said, will “give to Brussels the ability to come to countries and say, ‘We’re
not sure you’re applying your GAAR correctly. You didn’t audit this. It doesn’t seem
to us to be the right way to apply your member tax law.’

“One has to step back and ask, ‘What is Europe telling the rest of the world about
investing in Europe?' It sounds like they’re saying, ‘Don’t invest here because we
make up the laws as we go along.’

“And I’m not sure that that is a place that Europe wants to be,” Stack said.

Defending the U.S. Position

Stack defended the U.S.’s decision to fight the Apple matter.

“The old notion is that the rules should apply to those we vilify and those we don’t.
That’s what the rule of law is about,” he said. “As a responsible policy maker, it
would have been cowardice on our part not to show up and ask hard questions when the
principles at stake for the stability and growth of our countries and the global economy
were so strong.

“So yes, it may look like we’re defending an unpopular group of taxpayers but it’s
the right thing to do. We’re glad that we did it,”
Stack said.

To contact the reporter on this story: Penny Sukhraj in London at psukhraj@bna.com

To contact the editor responsible for this story: Rita McWilliams at rmcwilliams@bna.com

Pending European Commission State Aid Tax Cases
Case
Issue
Status
Amazon.com Inc. by Luxembourg (
SA.38944).
A 2003 unilateral APA granted by Luxembourg to Amazon EU Sarl, based in Luxembourg,
that records most of Amazon's European profits. Amazon EU Sarl pays a tax-deductible
royalty to a Luxembourg limited liability partnership that isn't subject to corporate
tax.
A preliminary decision Oct. 7, 2014, found the APA constituted state aid (23 Transfer Pricing Report 787, 10/16/14)
.
Apple Inc. by Ireland in the amount of 13 billion euros (
SA.38373).
On June 11, 2014, the commission initiated an investigation of two unilateral APAs
granted by Ireland in 1991 and 2007 to Apple Sales International (ASI). That company
is incorporated in Ireland and carries on a trade through its branch in Ireland but
is not tax resident in Ireland.
The commission Aug. 30 announced its final decision concluding that Apple Inc. benefited
from unlawful state aid granted by Ireland, and ordered recovery of up to 13 billion
euros plus compound interest. The decision found most profits of ASI's European sales
of Apple branded finished goods, including the iPhone, were allocated to ASI’s stateless
“head office” and thus remained untaxed (25 Transfer Pricing Report 554, 9/15/16)
. Ireland and Apple have both said they will appeal the decision (25 Transfer Pricing Report 560, 9/15/16)
.
Belgium's excess profit tax ruling system to 36 companies totaling some 700 million
euros (
SA.37667).
Belgium's excess profit scheme, applicable since 2005, allowed multinational companies
to reduce their corporate tax base by 50 percent to 90 percent to discount for “excess
profits” that allegedly result from being part of a multinational group. The group's
profit is compared with the hypothetical average profit a stand-alone company in a
comparable situation would have made.
The commission's final decision Jan. 11, 2016, said Belgium’s entire “excess profits
tax ruling system” constituted state aid (24 Transfer Pricing Report 1161, 1/21/16)
. Belgium appealed the commission's decision to the General Court of the European Union
on March 22, 2016 (24 Transfer Pricing Report 1587, 4/14/16)
.
French company Engie S.A.—formerly the GDF Suez group—from Luxembourg (
SA.44888).
Rulings from Luxembourg's tax authority appear to treat the same financial transaction
between companies of GDF Suez inconsistently—as both debt and equity.
The commission in a Sept. 19 press release said it considers the treatment in the
tax rulings gave tax benefits to GDF Suez that weren't available to other companies
in Luxembourg. Margrethe Vestager, commissioner in charge of competition policy,
said that while transactions can be taxed differently, “a single company cannot have
the best of two worlds for one and the same transaction” (see related story)
.
Fiat Chrysler Automobiles N.V. by Luxembourg in the amount of 20 million to 30 million
euros (
SA.38375).
A 2012 APA granted by Luxembourg to Fiat Finance & Trade Ltd. (FFT). FFT provides
financing to Fiat group companies and manages several group cash pools. The APA used
the transactional net margin method to calculate the interest rates charged by FFT.
A final decision Oct. 21, 2015, found the arrangements constitute state aid (24 Transfer Pricing Report 825, 10/29/15)
.Luxembourg on Dec. 4, 2015 appealed the decision to the EU General Court (24 Transfer Pricing Report 1009, 12/10/15)
McDonald's Corp. by Luxembourg (
SA.38945).
A 2009 Luxembourg tax ruling granted to McD Europe Franchising Sarl (Luxembourg).
McD Sarl owned group franchising rights and derived royalty income from its U.S. branch.
McDonald's argued that the branch was a permanent establishment of McD Sarl in the
U.S. under the Luxembourg-U.S. tax treaty, which doesn't require the profits to be
taxed in the other state.
The commission's Dec. 3, 2015, preliminary decision is that the rulings constitute
state aid (24 Transfer Pricing Report 1015, 12/10/15)
.
Starbucks Corp. by the Netherlands in the amount of 20 million to 30 million euros
(
SA.38374).
On June 11, 2014, the commission initiated an investigation of a 2008 Dutch unilateral
APA relating to the markup of royalty payments
paid by Starbucks Manufacturing EMEA BV to its U.K. affiliate, Alki LP. In the U.K.
the payments were tax-deductible royalties. The commission said instead of using the
transactional net margin method, the APA should have used the comparable uncontrolled
price method.
The commission's Oct. 21, 2015, final decision said the arrangements constitute state
aid (25 Transfer Pricing Report 281, 6/30/16)
.The Netherlands appealed the decision to the EU General Court of the European Union
Feb. 16, 2016.

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